IMF Working Papers

Small Firm Growth and the VAT Threshold Evidence for the UK

By Li Liu, Ben Lockwood, Eddy H.F. Tam

February 16, 2024

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Li Liu, Ben Lockwood, and Eddy H.F. Tam Small Firm Growth and the VAT Threshold Evidence for the UK, (USA: International Monetary Fund, 2024) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

This paper studies the effect of the VAT threshold on firm growth in the UK, using exogenous variation over time in the threshold, combined with turnover bin fixed effects, for identification. We find robust evidence that annual growth in turnover slows by about 1 percentage point when firm turnover gets close to the threshold, with no evidence of higher growth when the threshold is passed. Growth in firm costs shows a similar pattern, indicating that the response to the threshold is likely to be a real response rather than an evasion response. Firms that habitually register even when their turnover is below the VAT threshold (voluntary registered firms) have growth that is unaffected by the threshold, whereas firms that select into the Flat-Rate Scheme have a less pronounced slowdown response than other firms. Similar patterns of turnover and cost growth around the threshold are also observed for non-incorporated businesses. Finally, simulation results clarify the relative contribution of ``crossers" (firms who eventually register for VAT) and ``non-crossers" (those who permanently stay below the threshold) in explaining our empirical findings.

Subject: Compliance costs, Econometric analysis, Revenue administration, Taxes, Threshold analysis, Value-added tax

Keywords: Compliance costs, Firm growth, Firm turnover, Scheme firm, Size-based threshold, Threshold analysis, Turnover growth, Value-added tax, VAT, VAT threshold, VAT Threshold

Publication Details

  • Pages:

    39

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 2024/033

  • Stock No:

    WPIEA2024033

  • ISBN:

    9798400267260

  • ISSN:

    1018-5941

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